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P R O S P E C T U S
SMITH BARNEY
Appreciation
Fund Inc.
Class Z Shares Only
April 30, 1998
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
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PROSPECTUS
APRIL 30, 1998
Smith Barney Appreciation Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Appreciation Fund Inc. (the "Fund") is an open-end, diversified
management investment company which seeks long-term appreciation of sharehold-
ers' capital through investments primarily in equity securities.
This Prospectus sets forth concisely certain information about the Fund,
including expenses, that prospective investors will find helpful in making an
investment decision. Investors are encouraged to read this Prospectus carefully
and retain it for future reference.
The Class Z shares described in this Prospectus are currently offered exclu-
sively for sale to tax-exempt employee benefit and retirement plans of Smith
Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified Plans") and
to certain unit investment trusts sponsored by Smith Barney or any of its
affiliates ("Smith Barney UITs").
Additional information about the Fund is contained in a Statement of Addi-
tional Information ("SAI") dated April 30, 1998, as amended or supplemented
from time to time, that is available upon request and without charge by calling
or writing the Fund at the telephone number or address set forth above or by
contacting a Smith Barney Financial Consultant. The SAI has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
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FINANCIAL HIGHLIGHTS 4
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
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VALUATION OF SHARES 10
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DIVIDENDS, DISTRIBUTIONS AND TAXES 10
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PURCHASE, EXCHANGE AND REDEMPTION OF SHARES 11
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PERFORMANCE 12
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MANAGEMENT OF THE FUND 13
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ADDITIONAL INFORMATION 15
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</TABLE>
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer or solicitation in such jurisdiction.
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2
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THE FUND'S EXPENSES
The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Fund, based on the Fund's operating expenses for the fiscal year ended December
31, 1997:
<TABLE>
<CAPTION>
AS A % OF
APPRECIATION FUND AVERAGE NET ASSETS
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<S> <C>
ANNUAL FUND OPERATING EXPENSES
Management fees 0.59%
Other expenses None
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TOTAL FUND OPERATING EXPENSES 0.59%
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</TABLE>
The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." Other expenses in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase, Exchange and Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment in Class Z shares of
the Fund, assuming (1) 5.00% annual return
and (2) redemption at the end of each time
period: $ 6 $19 $33 $74
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</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
3
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FINANCIAL HIGHLIGHTS
The following information for the three years ended December 31, 1997 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated December 31, 1997. The
information for the fiscal period ended December 31, 1992 through the fiscal
year ended December 31, 1994 has been audited by other independent auditors.
The information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report,
which is incorporated by reference into the SAI.
FOR A CLASS Z SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
APPRECIATION FUND
<TABLE>
<CAPTION>
1997 1996 1995(1) 1994 1993(1) 1992(2)
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<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $12.87 $11.91 $10.16 $11.02 $10.66 $10.55
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INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.24 0.24 0.23 0.20 0.19 0.03
Net realized and
unrealized gain (loss) 3.18 2.09 2.75 (0.24) 0.71 0.33
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Total Income (Loss) From
Operations 3.42 2.33 2.98 (0.04) 0.90 0.36
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LESS DISTRIBUTIONS FROM:
Net investment income (0.26) (0.23) (0.23) (0.22) (0.18) (0.16)
Net realized gains (2.09) (1.14) (1.00) (0.60) (0.36) (0.09)
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Total distributions (2.35) (1.37) (1.23) (0.82) (0.54) (0.25)
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NET ASSET VALUE, END OF
YEAR $13.94 $12.87 $11.91 $10.16 $11.02 $10.66
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TOTAL RETURN 26.72% 19.66% 29.52% (0.41)% 8.47% 3.38%++
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NET ASSETS, END OF YEAR
(000S) 194,070 $153,034 $131,357 $101,532 $157,876 $151,427
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RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.59% 0.64% 0.77% 0.64% 0.66% 0.80%+
Net investment income 1.82 1.88 1.96 1.99 1.73 1.66+
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PORTFOLIO TURNOVER RATE 57% 62% 57% 52% 52% 21%
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AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS (3) $0.06 $0.06 $0.06 -- -- --
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) For the period from November 6, 1992 (inception date) to December 31,
1992.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
4
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is long-term appreciation of shareholders'
capital through investments primarily in equity securities. This investment
objective may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved.
The Fund attempts to achieve its investment objective by investing primarily
in equity securities (consisting of common stocks, preferred stocks, warrants,
rights and securities convertible into common stocks) which are believed to
afford attractive opportunities for investment appreciation. The core holdings
of the Fund are blue chip companies that are dominant in their industries. At
the same time, the Fund may hold securities of companies with prospects of
sustained earnings growth and/or companies with a cyclical earnings record if
it is felt these offer attractive investment opportunities. For example, the
Fund may invest in the securities of companies whose earnings are expected to
increase, companies whose securities prices are lower than are believed justi-
fied in relation to their underlying assets or earning power, or companies in
which changes are anticipated that would result in improved operations or
profitability. Typically, the Fund invests in middle- and larger-sized compa-
nies, though it does invest in smaller companies whose securities may reasona-
bly be expected to appreciate. The Fund's investments are spread broadly among
different industries. The Fund may hold issues traded over-the-counter as well
as those listed on one or more national exchanges, and the Fund may make
investments in foreign securities though management intends to limit such
investments to 10% of the Fund's assets. In analyzing securities for invest-
ment, Mutual Management Corp. ("MMC" or the "Adviser") (formerly Smith Barney
Mutual Funds Management Inc.) considers many different factors, including past
growth records, management capability, future earnings prospects and techno-
logical innovation, as well as general market and economic factors which can
influence the price of securities. While the Adviser considers dividend poten-
tial in selecting investments, current income for distribution to shareholders
is secondary to the Fund's principal objective of long-term capital apprecia-
tion. The value of the Fund's investments, and thus the net asset value of the
Fund's shares, will fluctuate in response to changes in market and economic
conditions, as well as the financial condition and prospects of issuers in
which the Fund invests.
Under normal market conditions, the majority of the Fund's portfolio con-
sists of common stocks, but it also may contain other equity securities as
described above, as well as short-term money market instruments for cash
management purposes. When the Adviser believes that market conditions warrant,
the Fund may adopt a temporary defensive investment posture, and invest in
debt obligations, increase its investment in short-term money market instru-
ments, or engage in repurchase agreement transactions with respect to the
securities it is authorized to hold (as described below).
5
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Further information about the Fund's investment policies, including a list of
those restrictions on its investment activities that cannot be changed without
shareholder approval, appears in the SAI.
INVESTMENT POLICIES AND STRATEGIES
Lending of Portfolio Securities -- Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial organizations. Loans of portfolio securities by the Fund
will be collateralized by cash, letters of credit or obligations of the United
States government and its agencies or instrumentalities ("U.S. government secu-
rities") which are maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. By lending its portfolio
securities, the Fund will seek to generate income by continuing to receive
interest on the loaned securities, by investing the cash collateral in short-
term instruments or by obtaining yield in the form of interest paid by the bor-
rower when U.S. government securities are used as collateral. The risks in
lending portfolio securities, as with other extensions of secured credit, con-
sist of possible delays in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the bor-
rower fail financially. Loans will be made to firms deemed by the Adviser to be
of good standing and will not be made unless, in the judgment of the Adviser,
the consideration to be earned from such loans would justify the risk.
Short-Term Investments -- As noted above, the Fund may invest in short-term
money market instruments, such as: U.S. government securities; certificates of
deposit, time deposits and bankers' acceptances issued by domestic banks (in-
cluding their branches located outside the United States and subsidiaries
located in Canada), domestic branches of foreign banks, savings and loan asso-
ciations and similar institutions; high grade commercial paper; and repurchase
agreements with respect to such instruments.
Repurchase Agreements -- The Fund will enter into repurchase agreements with
banks which are issuers of instruments acceptable for purchase by the Fund and
with certain dealers on the Federal Reserve Bank of New York's list of report-
ing dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually
not more than one week) subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed-upon price and time,
thereby determining the yield during the Fund's holding period. This arrange-
ment results in a fixed rate of return that is not subject to market fluctua-
tions during the Fund's holding period. Further information on repurchase
agreements and the risks associated with such investments appears in the SAI.
6
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Foreign Securities -- The Fund may invest in securities of non-U.S. issuers
in the form of American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") or similar securities representing interests in the common
stock of foreign issuers. Management intends to limit the Fund's investment in
these types of securities, together with other types of foreign securities, to
10% of the Fund's net assets. ADRs are receipts, typically issued by a U.S.
bank or trust company, which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe which evi-
dence a similar ownership arrangement. Generally, ADRs, in registered form,
are designed for use in the U.S. securities markets and EDRs are designed for
use in European securities markets. The underlying securities are not always
denominated in the same currency as the ADRs or EDRs. Although investment in
the form of ADRs or EDRs facilitates trading in foreign securities, it does
not mitigate the risks associated with investing in foreign securities.
Investments in foreign securities incur higher costs than investments in
U.S. securities, including higher costs in making securities transactions as
well as foreign government taxes which may reduce the investment return of the
Fund. In addition, foreign investments may include additional risks associated
with currency exchange rates, less complete financial information about indi-
vidual companies, less market liquidity and political instability.
Purchasing Put and Call Options on Securities -- The Fund may purchase put
options on securities owned by the Fund and on securities which the Fund may
acquire in the future. The Fund may purchase only put options that are traded
on a regulated exchange. By buying a put, the Fund limits its risk of loss
from a decline in the market value of the security until the put expires. Any
appreciation in the value of the underlying security, however, will be par-
tially offset by the amount of the premium paid for the put option and any
related transaction costs. The Fund may purchase call options on a security it
intends to purchase in the future to avoid the additional cost that would
result from a substantial increase in the market price of the security. Prior
to their expiration, put and call options may be sold in the closing sale
transactions (sales by the Fund, prior to the exercise of options it has pur-
chased, of options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid
for the option plus related transaction costs. The Fund can invest up to 5% of
its total assets in put and call options on securities.
Stock Index Options -- The Fund may purchase and write put and call options
on domestic and foreign stock indexes to hedge against risks of market-wide
price movements affecting that portion of its assets invested in the country
whose stocks are subject to the hedge. A stock index measures the movement of
a certain group of stocks by assigning relative values to the common stocks
included in the index.
7
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Options on stock indexes are similar to options on securities. Because no
underlying security can be delivered, however, the option represents the hold-
er's right to obtain from the writer, in cash, a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying index on the exercise
date. Options on foreign stock indexes are similar to options on domestic
stock exchanges. Like domestic stock options, foreign stock index options are
subject to position and exercise limits and other regulations imposed by the
exchange on which they are traded. Unlike domestic stock index options, for-
eign stock index options carry risks associated with investing in foreign
securities. The advisability of using stock index options to hedge against the
risk of market-wide movements will depend on the extent of diversification of
the Fund's stock investments and the sensitivity of its stock investments to
factors influencing the underlying index. The effectiveness of purchasing or
writing stock index options as a hedging technique will depend upon the extent
to which price movements in the Fund's securities investments correlate with
price movements in the stock index selected. In addition, successful use by
the Fund of options will be subject to the ability of the Fund's investment
adviser to predict correctly movements in the direction of the underlying
index. The Fund can invest up to 5% of its total assets in put and call
options on domestic and foreign stock indexes.
When the Fund writes an option on a stock index, it will establish a segre-
gated account with the Fund's custodian, or with a foreign subcustodian in
which the Fund will deposit cash or cash equivalents or a combination of both
in the amount equal to the market value of the option. The Fund will maintain
the account while the option is open.
Futures Contracts and Related Options -- The Fund may enter into futures
contracts and purchase and write (sell) options on these contracts, including
but not limited to interest rate, securities index and foreign currency con-
tracts and put and call options on these futures contracts.
These contracts will be entered into only upon the concur-
rence of the Adviser that such contracts are necessary or appropriate in the
management of the Fund's assets. These contracts will be entered into on
exchanges designated by the Commodity Futures Trading Commission ("CFTC") or,
consistent with CFTC regulations, on foreign exchanges. These transactions may
be entered into for bona fide hedging purposes and other permissible risk man-
agement purposes, including protecting against anticipated changes in the
value of securities the Fund intends to purchase.
The Fund will not enter into futures contracts and related options for which
the aggregate initial margin and premiums exceed 5% of the fair market value
of the Fund's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into. All futures and
options on futures positions will
8
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
be covered by owning the underlying security or segregation of assets. With
respect to long positions in a futures contract or option (e.g., futures con-
tracts to purchase the underlying instrument and call options purchased or put
options written on these futures contracts or instruments), the underlying
value of the futures contract at all times will not exceed the sum of cash,
short-term U.S. debt obligations or other high quality obligations set aside
for this purpose.
The Fund may lose the expected benefit of these futures or options transac-
tions and may incur losses if the prices of the underlying commodities move in
an unanticipated manner. In addition, changes in the value of the Fund's
futures and options positions may not prove to be perfectly or even highly cor-
related with changes in the value of its portfolio securities. Successful use
of futures and related options is subject to the Adviser's ability to predict
correctly movements in the direction of the securities markets generally, which
ability may require different skills and techniques than predicting changes in
the prices of individual securities. Moreover, futures and options contracts
may only be closed out by entering into offsetting transactions on the exchange
where the position was entered into (or a linked exchange), and, a result of
daily price fluctuations limits, there can be no assurance the offsetting
transaction could be entered into at an advantageous price at a particular
time. Consequently, the Fund may realize a loss on a futures contract or option
that is not offset by an increase in the value of its portfolio securities that
are being hedged or the Fund may not be able to close a futures or options
position without incurring a loss in the event of adverse price movements.
Portfolio Transactions and Turnover -- Portfolio securities transactions on
behalf of the Fund are placed by the Adviser with a number of brokers and deal-
ers, including Smith Barney. Smith Barney has advised the Fund that in transac-
tions with the Fund, Smith Barney charges a commission rate at least as favora-
ble as the rate that Smith Barney charges its comparable unaffiliated customers
in similar transactions.
The Fund generally does not engage in short-term trading but intends to pur-
chase securities for long-term capital appreciation. While the Fund's portfolio
turnover rate has in the past exceeded 100%, the Fund's annual portfolio turn-
over rate is not expected to exceed 100%.
Year 2000 -- The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Smith Barney, the Fund's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact on the Fund's
operations,
9
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
including the handling of securities trades, pricing and account services. The
Adviser and Smith Barney have advised the Fund that they have been reviewing
all of their computer systems and actively working on necessary changes to
their systems to prepare for the year 2000 and expect that their systems will
be compliant before that date. In addition, the Adviser has been advised by the
Fund's custodian, transfer agent and accounting service agent that they are
also in the process of modifying their systems with the same goal. There can,
however, be no assurance that the Adviser, Smith Barney or any other service
provider will be successful, or that interaction with other non-complying com-
puter systems will not impair Fund services at that time.
VALUATION OF SHARES
The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on each
day that the NYSE is open by dividing the value of the Fund's net assets
attributable to Class Z by the number of shares of the Class outstanding. The
per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Directors. Short-
term investments that mature in 60 days or less are valued at amortized cost
whenever the Fund's Board of Directors determines that amortized cost reflects
fair value of those instruments. Further information regarding the Fund's valu-
ation policies is contained in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all its net investment
income (that is, its income other than its net realized capital gains) and net
realized capital gains, if any, once a year, normally at the end of the year in
which earned or at the beginning of the next year.
Unless a shareholder is eligible for qualified distributions and instructs
that dividends and capital gains distributions on shares be paid in cash and
credited to the shareholder's account, dividends and capital gains distribu-
tions will be reinvested automatically in additional shares of the Class at net
asset value, subject to no sales charge or CDSC. In addition, in order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution, shortly before December 31 in
10
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DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
HEAD DATE
each year, of any undistributed ordinary income or capital gains and expects
to pay any other dividends and distributions necessary to avoid the applica-
tion of this tax.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended.
Dividends paid from net investment income and distributions of net realized
short-term capital gains are taxable to shareholders as ordinary income,
regardless of how long shareholders have held their Fund shares and whether
such dividends and distributions are received in cash or reinvested in addi-
tional Fund shares. Distributions of net realized long-term capital gains are
taxable to shareholders as long-term capital gains, regardless of how long
shareholders have held Fund shares and whether such distributions are received
in cash or are reinvested in additional Fund shares. Furthermore, as a general
rule, a shareholder's gain or loss on a sale or redemption of Fund shares will
be a long-term capital gain or loss if the shareholder has held the shares for
more than one year and will be a short-term capital gain or loss if the share-
holder has held the shares for one year or less. Some of the Fund's dividends
declared from net investment income may qualify for the Federal dividends-
received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and distri-
butions are mailed annually. Each shareholder also will receive, if appropri-
ate, various written notices after the close of the Fund's prior taxable year
as to the Federal income tax status of his or her dividends and distributions
which were received from the Fund during the Fund's prior taxable year. Share-
holders should consult their plan document or tax advisors about the tax con-
sequences associated with participating in a Qualified Plan or Smith Barney
UIT.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are effected at the
net asset value next determined after a purchase order is received by Smith
Barney (the "trade date"). Payment is due to Smith Barney on the third
business day (the "settlement date") after the trade date. Investors who make
payment prior to the settlement date may designate a temporary investment
(such as a money market fund of the Smith Barney Mutual Funds) for such pay-
ment until settlement date. The Fund reserves the right to reject any purchase
order and to suspend the offering of shares for a period of time. There are no
minimum investment requirements for Class Z shares; however, the Fund reserves
the right to vary this policy at any time.
11
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PURCHASE, EXCHANGE AND REDEMPTION OF SHARES (CONTINUED)
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day that the Fund calculates its net asset
value, are priced according to the net asset value determined on that day. See
"Valuation of Shares." Certificates for Fund shares are issued upon request to
the Fund's transfer agent.
Shareholders may redeem their shares on any day on which the Fund calculates
its net asset value. See "Valuation of Shares." Redemption requests received
in proper form prior to the close of regular trading on the NYSE are priced at
the net asset value per share determined on that day. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value as next determined. Shareholders acquiring Class Z shares through
a Qualified Plan or a Smith Barney UIT should consult the terms of their
respective plans for redemption provisions.
Holders of Class Z shares should consult their Qualified Plans for informa-
tion about exchange options.
PERFORMANCE
From time to time, the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements.
These figures are based on historical earnings and are not intended to indi-
cate future performance. Total return is computed for a specified period of
time assuming deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and capital gain dis-
tributions on the reinvestment dates at prices calculated as stated in this
Prospectus, then dividing the value of the investment at the end of the period
so calculated by the initial amount invested and subtracting 100%. The stan-
dard average annual total return, as prescribed by the SEC, is derived from
this total return, which provides the ending redeemable value. Such standard
total return information may also be accompanied with nonstandard total return
information for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Fund
calculates current dividend return for Class Z shares by annualizing the most
recent monthly distribution and dividing by the net asset value on the last
day of the period for which the current dividend return is presented. The cur-
rent dividend return may vary from time to time depending on market condi-
tions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing the Fund's current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing the Class Z
12
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PERFORMANCE (CONTINUED)
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the persons or companies that furnish services to the
Fund, including agreements with the Fund's distributor, investment adviser and
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The SAI
contains background information regarding each Director and executive officer
of the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR
The Adviser is a registered investment adviser whose principal executive
offices are located at 388 Greenwich Street, New York, New York 10013, and
serves as the Fund's investment adviser. The Adviser is a wholly owned subsidi-
ary of Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified financial
services holding company engaged, through its subsidiaries, principally in four
business segments: Investment Services, including Asset Management, Consumer
Financial Services, Life Insurance Services and Property & Casualty Insurance
Services. The Adviser has been in the investment counseling business (through
its predecessors) since 1968 and renders investment advice to a wide variety of
individual, institutional and investment company clients that had aggregate
assets under management as of March 31, 1998 in excess of $100 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
the Adviser manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities, and employs professional portfo-
lio managers and securities analysts who provide research services to the Fund.
The Adviser also serves as the Fund's administrator and oversees all aspects of
the Fund's administration.
Investment advisory fees are computed daily and paid monthly at the following
annual rates of the value of the Fund's average daily net assets: 0.55% up to
$250 million; 0.513% of the next $250 million; 0.476% of the next $500 million;
0.439% of the next $1 billion; 0.402% of the next $1 billion; and 0.365% of the
net assets in excess of $3 billion. For the fiscal year ended December 31,
1997, the Fund paid investment advisory fees equal to 0.43% of the value of the
average daily net assets of the Fund.
13
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
Administration fees are computed daily and paid monthly at the following
annual rates of the value of the Fund's average daily net assets: 0.20% up to
$250 million; 0.187% of the next $250 million; 0.174% of the next $500 million;
0.161% of the next $1 billion; 0.148% of the next $1 billion; and 0.135% of the
net assets in excess of $3 billion. For the fiscal year ended December 31,
1997, the Fund paid administration fees equal to 0.16% of the value of the
average daily net assets of the Fund. For the Fund's last fiscal year, total
operating expenses for Class Z shares were 0.59%.
PORTFOLIO MANAGEMENT
Harry D. Cohen, Vice President and Investment Officer of the Fund and a Man-
aging Director of Smith Barney, is primarily responsible for management of the
Fund's assets. Mr. Cohen has served in this capacity since January of 1979, and
manages the day-to-day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1997 is included
in the Annual Report dated December 31, 1997. A copy of the Annual Report may
be obtained upon request and without charge from a Smith Barney Financial Con-
sultant or by writing or calling the Fund at the address or phone number listed
on page one of this Prospectus.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also sub-
ject to approval by the stockholders of each of Travelers and Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"), the requirements of the Glass-Steagall Act and certain other laws and
regulations. Although the effects of the merger of Travelers and Citicorp and
compliance with the requirements of the BHCA and the Glass-Steagall Act are
still under review, the Adviser does not believe that its compliance with
applicable law following the merger of Travelers and Citicorp will have a mate-
rial adverse effect on its ability to continue to provide the Fund with the
same level of investment advisory services that it currently receives.
DISTRIBUTOR -- SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.
14
<PAGE>
ADDITIONAL INFORMATION
The Fund was incorporated in the state of Maryland on September 2, 1969 and
is registered with the SEC as a diversified, open-end management investment
company.
The Fund offers shares of common stock currently classified into five Clas-
ses -- A, B, C , Y and Z. Each Class represents an identical pro rata interest
in the Fund's investment portfolio. As a result, the Classes have the same
rights, privileges and preferences, except with respect to: (a) the designa-
tion of each Class; (b) the effect of the respective sales charges, if any,
for each Class; (c) the distribution and/or service fees, if any, borne by
each Class pursuant to a plan adopted by the Fund pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"); (d) the
expenses allocable to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g)
the conversion feature of Class B shares. The Fund's Board of Directors does
not anticipate that there will be any conflicts among the interests of the
holders of the different Classes. The Directors, on an ongoing basis, will
consider whether any such conflict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any pur-
pose upon the written request of shareholders holding at least 10% of the
Fund's outstanding shares and the Fund will assist shareholders in calling
such a meeting as required by the 1940 Act. When matters are submitted for
shareholder vote, shareholders of each Class will have one vote for each full
share owned and a proportionate fractional vote for any fractional share held
of that Class. Generally, shares of the Fund will be voted on a Fund-wide
basis on all matters except matters affecting only the interests of one or
more of the Classes.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include a listing of the investment securities held by the Fund
at the end of the period covered.
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data Investor Services Group, Inc,, located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
Shareholders may seek information regarding the Fund from their Smith Barney
Financial Consultant.
15
<PAGE>
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<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
APPRECIATION
FUND INC.
388 Greenwich Street
New York, New York 10013
FD0794 4/98
Smith Barney
Appreciation Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information
April 30, 1998
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney
Appreciation Fund Inc. (the "Fund") dated April 30, 1998, as amended or
supplemented from time to time, and should be read in conjunction with
the Fund's Prospectus. The Fund's Prospectus may be obtained from any
Smith Barney Financial Consultant, or by writing or calling the Fund at
the address or telephone number set forth above. This Statement of
Additional Information, although not in itself a prospectus, is
incorporated by reference into the Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where
shown below:
Management of the Fund 1
Investment Objective and Management Policies 6
Purchase of Shares 12
IRA and Other Prototype Retirement Plans 13
Redemption of Shares 14
Distributors 15
Valuation of Shares 17
Exchange Privilege 18
Performance Data 18
Taxes (See in the Prospectus "Dividends, Distributions and Taxes") 21
Additional Information 23
Financial Statements 23
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are
the following:
Name Service
Smith Barney Inc.
("Smith Barney")
PFS Distributors, Inc.
("PFS Distributors") Distributors
Mutual Management Corp.
("MMC") Investment Adviser and
Administrator
PNC Bank, National Association
("PNC") Custodian
First Data Investor Services Group, Inc.,
(the "Transfer Agent") Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional
Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund, together
with information as to their principal business occupations during the
past five years, are shown below. Each Director who is an "interested
person'' of the Fund, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"), is indicated by an asterisk.
Herbert Barg, Director (Age 75). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director (Age 75). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End
Drive, Ramsey, New Jersey 07466.
Martin Brody, Director (Age 76). Consultant, HMK Associates, a
financial consulting firm; retired Vice Chairman of the Board of
Restaurant Associates Corp. Director of Jaclyn, Inc., an apparel design
and manufacturing company. His address is HMK Associates, Three ADP
Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director (Age 60). Professor, Graduate School of
Business Administration, Harvard University; Business Consultant. His
address is Graduate School of Business Administration, Harvard
University, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 67). Managing Partner of Dorsett
McCabe Management, Inc., an investment counseling firm; Director of
Research Corporation Technologies, Inc., a non-profit patent-clearing and
licensing firm. His address is 201 East 62nd Street, New York, New York
10021.
Elliot S. Jaffe, Director (Age 71). Chairman of the Board and Chief
Executive Officer of The Dress Barn, Inc. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 66). Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Director (Age 67). Financial Consultant. His
address is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board, President and Investment
Officer (Age 64). Managing Director of Smith Barney and Chairman of
Smith Barney Strategy Advisers Inc.; Director and President of MMC and
Travelers Investment Adviser, Inc. ("TIA"); prior to July 1993, Senior
Executive Vice President of Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers"), Vice Chairman of Shearson Asset Management. Mr.
McLendon is Chairman of the Board and Investment Officer of 42 Smith
Barney Mutual Funds. His address is 388 Greenwich Street, New York, New
York 10013.
Cornelius C. Rose, Jr., Director (Age 64). President, Cornelius C.
Rose Associates, Inc., Financial Consultants, and Chairman and Director
of Performance Learning Systems, an educational consultant. His address
is P.O. Box 355, Fair Oaks, Enfield, New Hampshire 03748.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney; Director and Senior Vice President of
MMC and TIA. Mr. Daidone serves as Senior Vice President and Treasurer
of 42 Smith Barney Mutual Funds. His address is 388 Greenwich Street,
New York, New York 10013.
Harry D. Cohen, Vice President and Investment Officer (Age 55).
Managing Director of Smith Barney; Executive Vice President of Smith
Barney; prior to July 1993, President of Asset Management Division of
Shearson Lehman Brothers and Executive Vice President of Shearson Lehman
Brothers. Mr. Cohen also serves as Vice President and Investment Officer
of 1 other of the Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 47). Managing Director of Smith
Barney; General Counsel and Secretary of MMC and TIA. Ms. Sydor serves
as Secretary of 42 Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, New York 10013.
Each Director also serves as a director, trustee and/or general partner
of certain other mutual funds for which Smith Barney serves as
distributor. As of April 3, 1998, the Directors and officers of the
Fund, as a group, owned less than 1.00% of the outstanding common stock
of the Fund. As of April 3, 1998, to the knowledge of the Fund and the
Board of Directors, no single shareholder or "group" (as that term is
used in Section 13(d) of the Securities Act of 1934) beneficially owned
more than 5% of the outstanding shares of the Fund with the exception of
the following:
Shareholder
Class
Percent Ownership
Citibank NA Cust. Smith
Barney
Shearson 401K Savings Plan
Smith Barney Account
111 Wall Street
New York, New York 10043
Class Z
99.94%
Smith Barney Concert
Allocation Series Inc.
Balanced Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
65.67%
Smith Barney Concert
Allocation Series Inc.
Conservative Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
17.78%
Smith Barney Concert
Allocation Series Inc.
Select Balanced Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
8.88%
Smith Barney Concert
Allocation Series Inc.
Income Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
5.12%
No officer, director or employee of Smith Barney or any parent or
subsidiary receives any compensation from the Fund for serving as an
officer or Director of the Fund. The Fund pays each Director who is not
an officer, director or employee of Smith Barney or any of its affiliates
a fee of $3,000 per annum plus $500 per in-person meeting and $100 per
telephonic meeting. Upon attainment of age 80 Directors are required to
change to emeritus status. Directors Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they receive
$l,500 per annum plus $250 per in-person meeting and $50 per telephonic
meeting. All Directors are reimbursed for travel and out-of-pocket
expenses incurred in attending such meetings.
For the calendar year ended December 31, 1997, the Directors of the Fund
were paid the following compensation.
Total
Pension or Compensation Number of
Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors Fund Complex
Herbert Barg $5,600 $0 $101,600 16
Alfred Bianchetti 5,600 0 49,600 11
Martin Brody 5,000 0 119,814 19
Dwight Crane 5,600 0 133,850 22
Burt Dorsett 5,600 0 49,600 11
Elliot Jaffe 5,500 0 48,500 11
Stephen Kaufman 5,600 0 91,964 13
Joseph McCann 5,600 0 49,600 11
Heath McLendon+ 0 0 0 42
Cornelius Rose 5,600 0 49,600 11
+ Designates an "interested" Director.
Investment Adviser and Administrator-MMC
MMC (formerly Smith Barney Mutual Funds Management Inc.) serves as
investment adviser to the Fund pursuant to a written agreement (the
"Advisory Agreement"), which was first approved by the Fund's Board of
Directors, including a majority of the Directors who are not interested
persons of the Fund or Smith Barney (the "Independent Directors"), on
April 1, 1993 and by shareholders on June 1, 1993. The services provided
by MMC under the Advisory Agreement are described in the Prospectus under
"Management of the Fund." MMC pays the salary of any officer and employee
who is employed by both it and the Fund. MMC bears all expenses in
connection with the performance of its services. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), which in
turn is a wholly owned subsidiary of Travelers Group Inc. ("Travelers").
As compensation for MMC's investment advisory services rendered to the
Fund, the Fund pays a fee computed daily and paid monthly at the
following annual rates of the Fund's average daily net assets: 0.55%, up
to $250 million; 0.513% of the next $250 million; 0.476% of the next $500
million; 0.439% of the next $1 billion, 0.402% of the next $l billion;
and 0.365% of the net assets in excess of $3 billion. For the fiscal
years ended December 31, 1997, 1996 and 1995, the Fund paid $16,921,518,
$14,352,911 and $12,764,132, respectively, in investment advisory fees.
MMC also serves as administrator to the Fund pursuant to a written
agreement dated April 10, 1994 (the "Administration Agreement"), which
was most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors of the Fund or Smith Barney, on
July 19, 1995. The services provided by MMC under the Administration
Agreement are described in the Prospectus under "Management of the Fund."
MMC pays the salary of any officer and employee who is employed by both
it and the Fund and bears all expenses in connection with the performance
of its services.
As compensation for administrative services rendered to the Fund, MMC
receives a fee computed daily and paid monthly at the following annual
rates: 0.20%, of the value of the Fund's average daily net assets up to
$250 million; 0.187% of the next $250 million; 0.174% of the next $500
million; 0.161% of the next $1 billion; 0.148% of the next $1 billion and
0.135% of the net assets in excess of $3 billion. For the fiscal years
ended December 31, 1997, 1996 and 1995, the Fund paid $6,212,415,
$5,262,374 and $4,675,818 in administration fees.
The Fund bears expenses incurred in its operation including: taxes,
interest, brokerage fees and commissions, if any; fees of Directors who
are not officers, directors, shareholders or employees of Smith Barney or
MMC; SEC fees and state Blue Sky qualification fees; charges of
custodians; transfer and dividend disbursing agent's fees; certain
insurance premiums; outside auditing and legal expenses; costs of
maintaining corporate existence; investor services (including allocated
telephone and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of
shareholders' reports and shareholder meetings; and meetings of the
officers or Board of Directors of the Fund.
MMC and the Fund have agreed that it in any fiscal year the aggregate
expenses of the Fund (including fees paid pursuant to the Advisory and
Administration Agreements, but excluding interest, taxes, brokerage, fees
paid pursuant to the Fund's services and distribution plan, and, with the
prior written consent of the necessary state securities commissions,
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Fund, MMC will, to the extent required by state
law, reduce its management fees by such excess expense. Such a fee
reduction, if any, will be reconciled on a monthly basis. [The most
restrictive state expense limitation applicable to the Fund would require
MMC to reduce its fees in any year that such excess expenses exceed 2.50%
of the first $30 million of average net assets, 2.00% of the next $70
million of average net assets and 1.50% of the remaining average assets.
No fee reduction was necessary for the 1997,1996 or 1995 fiscal years.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Fund. The Independent
Directors of the Fund have selected Stroock & Stroock & Lavan, LLP to
serve as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditor to examine and report on
the Fund's financial statements and highlights for the fiscal year ending
December 31, 1998.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies
it employs to achieve its objective. This section contains supplemental
information concerning the types of securities and other instruments in
which the Fund may invest, the investment policies and portfolio
strategies that the Fund may utilize and certain risks attendant to such
investments, policies and strategies.
Money Market Instruments. As stated in the Prospectus, the Fund may
invest for temporary defensive purposes in corporate and government bonds
and notes and money market instruments. Money market instruments in
which the Fund may invest include: obligations issued or guaranteed by
the United States government, its agencies or instrumentalities ("U.S.
government securities"); certificates of deposit, time deposits and
bankers' acceptances issued by domestic banks (including their branches
located outside the United States and subsidiaries located in Canada),
domestic branches of foreign banks, savings and loan associations and
similar institutions; high grade commercial paper; and repurchase
agreements with respect to the foregoing types of instruments. The
following is a more detailed description of such money market
instruments.
Certificates of deposit ("CDs") are short-term, negotiable obligations of
commercial banks. Time deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified periods of time at
stated interest rates. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be
members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation the ("FDIC"). Domestic banks organized
under state law are supervised and examined by state banking authorities
but are members of the Federal Reserve System only it they elect to join.
Most state banks are insured by the FDIC (although such insurance may not
be of material benefit to the Fund, depending upon the principal amount
of CDs of each bank held by the Fund) and are subject to Federal
examination and to a substantial body of Federal law and regulation. As
a result of governmental regulations, domestic branches of domestic banks
are, among other things, generally required to maintain specialized
levels of reserves, and are subject to other supervision and regulation
designed to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs,
may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and
governmental regulation. Such obligations are subject to different risks
than are those of domestic banks or domestic branches of foreign banks.
These risks include foreign economic and political developments, foreign
governmental restrictions that may adversely affect payment of principal
and interest on the obligations, foreign exchange controls and foreign
withholding and other taxes on interest income. Foreign branches of
domestic banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may
be publicly available about a foreign branch of a domestic bank than
about a domestic bank. CDs issued by wholly owned Canadian subsidiaries
of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the
foreign bank has its head office. A domestic branch of a foreign bank
with assets in excess of $1 billion may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in
which the branch is located if the branch is licensed in that state. In
addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may or may not be
required: (a) to pledge to the regulator by depositing assets with a
designated bank within the state, an amount of its assets equal to 5% of
its total liabilities; and (b) to maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies
or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less
publicly available information about a domestic branch of a foreign bank
than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks or by domestic branches
of foreign banks, MMC will carefully evaluate such investments on a case-
by-case basis. Savings and loans associations whose CDs may be purchased
by the Fund are supervised by the Office of Thrift Supervision and are
insured by the Savings Association Insurance Fund. As a result, such
savings and loan associations are subject to regulation and examination.
American, European and Continental Depositary Receipts. The Fund may
invest in the securities of foreign and domestic issuers in the form of
American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs
are receipts typically issued by a U.S. bank or trust company that
evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which sometimes are referred to as Continental
Depositary Receipts ("CDRs"), are receipts issued in Europe typically by
foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets and EDRs and CDRs, in bearer
form, are designed for use in European securities markets.
Lending of Portfolio Securities. As stated in the Prospectus, the Fund
has the ability to lend securities from its portfolio to brokers, dealers
and other financial organizations. Such loans, if and when made, may not
exceed 33 1/3% of the Fund's total assets taken at value. The Fund may
not lend its portfolio securities to Smith Barney or its affiliates
unless it has applied for and received specific authority from the SEC.
Loans of portfolio securities by the Fund will be collateralized by cash,
letters of credit or U S. government securities that are maintained at
all times in an amount equal to at least 100% of the current market value
of the loaned securities.
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U S.
government securities are used as collateral. Requirements of the SEC,
which may be subject to future modifications, currently provide that the
following conditions must be met whenever the Fund's portfolio securities
are loaned: (a) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower; (b) the borrower must increase
such collateral whenever the market value of the securities rises above
the value of such collateral; (c) the Fund must be able to terminate the
loan at any time; (d) the Fund must receive reasonable interest on the
loan, as well as an amount equal to any dividends, interest or other
distributions on the loaned securities, and any increase in market value;
(e) the Fund may pay only reasonable custodian fees in .connection with
the loan; and ( f) voting rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting the investment
occurs, the Fund's Board of Directors must terminate the loan and regain
the right to vote the securities. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans will be made to firms deemed by MMC to
be of good standing and will not be made unless, in the judgment of MMC,
the consideration to be earned from such loans would justify the risk.
From time to time, the Fund may return a part of the interest earned from
the investment of collateral received for securities loaned to: (a) the
borrower; and/or (b) a third party, which is unaffiliated with the Fund
or with Smith Barney and, which is acting as a "finder."
Convertible Securities. Convertible securities are fixed-income
securities that may be converted at either a stated price or stated rate
into underlying shares of common stock. Convertible securities have
general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature,
the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks and,
therefore, also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the
market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying
common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no
securities investments are without risk, investments in convertible
securities generally entail less risk than investments in common stock of
the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than
common stocks. Of course, like all fixed-income securities, there can be
no assurance of current income because the issuers of the convertible
securities may default on their obligations. Convertible securities,
however, generally offer lower interest or dividend yields than non-
convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing
fixed income, offers the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no
assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible
bonds, as corporate debt obligations, enjoy seniority in right of payment
to all equity securities, and convertible preferred stock is senior to
common stock, of the same issuer. Because of the subordination feature,
however, convertible securities typically have lower ratings than similar
non-convertible securities.
Warrants. Because a warrant does not carry with it the right to
dividends or voting rights with respect to the securities that the
warrant holder is entitled to purchase, and because it does not represent
any rights to the assets of the issuer, a warrant may be considered more
speculative than certain other types of investments. In addition, the
value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date. The investment in warrants,
valued at the lower of cost or market, may not exceed 5% of the value of
the Fund's net assets. Included within that amount, but not to exceed 2%
of the value of the Fund's net assets, may be warrants that are not
listed on the New York Stock Exchange, Inc. (the "NYSE") or the American
Stock Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
Preferred Stock. Preferred stocks, like debt obligations, are generally
fixed-income securities. Shareholders of preferred stocks normally have
the right to receive dividends at a fixed rate when and as declared by
the issuer's board of directors, but do not participate in other amounts
available for distribution by the issuing corporation. Dividends on the
preferred stock may be cumulative, and all cumulative dividends usually
must be paid prior to common shareholders receiving any dividends.
Preferred stock dividends must be paid before common stock dividends and,
for that reason, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated
value, and are senior in right of payment to common stock. Preferred
stocks are, however, equity securities in the sense that they do not
represent a liability of the issuer and, therefore, do not offer as great
a degree of protection of capital or assurance of continued income as
investments in corporate debt securities. In addition, preferred stocks
are subordinated in right of payment to all debt obligations and
creditors of the issuer, and convertible preferred stocks may be
subordinated to other preferred stock of the same issuer.
Futures Contracts and Related Options. Futures contracts and options
thereon may be undertaken for hedging and other risk management purposes
in an effort to reduce the impact of several kinds of anticipated price
fluctuation risks on the securities held by the Fund. For example,
futures contracts for the sale of foreign currency might be entered into
to protect against declines in the value of currencies in which portfolio
securities are denominated; and put options on interest rate futures
might be purchased to protect against declines in the market values of
debt securities occasioned by higher interest rates. If these
transactions are successful, the futures or options positions taken by
the Fund will rise in value by an amount which approximately offsets the
decline in value of the portion of the securities held by the Fund that
is being hedged.
On other occasions, the Fund may enter into contracts to purchase
the underlying instrument. For example, futures contracts for the
purchase of debt securities might be entered into to protect against an
anticipated increase in the price of debt securities to be purchased in
the future resulting from decreased interest rates.
The Fund will incur brokerage costs whether or not its hedging is
successful and will be required to post and maintain "margin" as a good-
faith deposit against performance of its obligations under futures
contracts and under options written by the Fund. Futures and options
positions are marked to the market daily and the Fund may be required to
make subsequent "variation" margin payments depending upon whether its
positions increase or decrease in value. In this context margin payments
involve no borrowing on the part of the Fund.
Options on Securities. The Fund may purchase put and call options on
securities owned by the Fund and on securities which the Fund may acquire
in the future. The exercise price of the options may be below, equal to
or above the market values of the underlying securities at the times the
options are written.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. In light of this
fact and current trading conditions, the Fund expect to purchase not only
call or put options issued by the Clearing Corporation, but also options
in the domestic and foreign over-the-counter markets. When the Fund has
purchased an option and engages in a closing sale transaction, whether
the Fund realizes a profit or loss will depend upon whether the amount
received in the closing sale transaction is more or less than the premium
that the Fund initially paid for the original option plus the related
transaction costs.
Although the Fund generally will purchase only those options for
which MMC believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient
trading interest to create a liquid secondary market on a securities
exchange will exist for any particular option or at any particular time,
and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered
inadequate certain of the facilities of the Clearing Corporation and
securities exchanges and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There can
be no assurance that similar events, or events that may otherwise
interfere with the timely execution of customers' orders, will not recur.
In such event, it might not be possible to effect closing transactions in
particular options.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be
held or exercised within certain time periods, by an investor or group
of investors acting in concert (regardless of whether the options are
written on the same or different securities exchanges or are held,
written or exercised in one or more accounts or through one or more
brokers). It is possible that the Fund and other clients of MMC and
certain of their affiliates may be considered to be such a group. A
securities exchange may order the liquidation of positions found to be in
violation of these limits and it may impose certain other sanctions.
Stock Index Options. The Fund may purchase and write put and call
options on domestic and foreign stock indexes for the purpose of hedging
their portfolios. A stock index fluctuates with changes in the market
values of the stocks included in the index. Stock index options may be
based on a broad market index such as the New York Stock Exchange
Composite Index or a narrower market index such as the Standard & Poor's
Daily Price Index of 500 Common Stocks ("S&P 500"). Indexes also may be
based on an industry or market segment.
Options on stock indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving
the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive a cash
"exercise settlement amount" equal to (a) the amount, if any, by which
the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash received will be equal
to such difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset
its position in stock index options prior to expiration by entering into
a closing transaction on an exchange, or it may let the option expire
unexercised.
The effectiveness of purchasing stock index options as a hedging
technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price
movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or,
in the case of certain indexes, in an industry or market segment, rather
than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indexes will be subject to
MMC's ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
The Fund will engage in stock index options transactions only when
determined by MMC to be consistent with the Fund's efforts to control
risk. There can be no assurance that such judgment will be accurate or
that the use of these portfolio strategies will be successful.
Investment Restrictions
The Fund has adopted the following investment restrictions for the
protection of shareholders. Restrictions l through 7 below cannot be
changed without approval by the holders of a majority of the outstanding
shares of the Fund, defined as the lesser of (a) 67% or more of the
Fund's shares present at a meeting, if the holders of more than 50% of
the outstanding shares are present in person or by proxy or (b) more than
50% of the Fund's outstanding shares. The remaining restrictions may be
changed by the Fund's Board of Directors at any time. In accordance with
these restrictions, the Fund will not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Issue "senior securities" as defined in the 1940 Act and the rules,
regulations and orders thereunder, except as permitted under the 1940
Act and the rules, regulations and orders thereunder.
3. Invest more than 25% of its total assets in securities, the issuers
of which are in the same industry. For purposes of this limitation,
U.S. government securities and securities of state or municipal
governments and their political subdivisions are not considered to
be issued by members of any industry.
4. Borrow money, except that (a) the Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise require the
untimely disposition of securities, and (b) the Fund may, to the
extent consistent with its investment policies, enter into reverse
repurchase agreements, forward roll transactions and similar
investment strategies and techniques. To the extent that it engages
in transactions described in (a) and (b), the Fund will be limited
so that no more than 33 1/3% of the value of its total assets
(including the amount borrowed), valued at the lesser of cost or
market, less liabilities (not including the amount borrowed)
valued at the time the borrowing is made, is derived from such
transactions.
5. Make loans. This restriction does not apply to: (a) the purchase of
debt obligations in which the Portfolio may invest consistent with
its investment objectives and policies; (b) repurchase agreements;
and (c) loans of its portfolio securities, to the fullest extent
permitted under the 1940 Act.
6. Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities.
7. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts, but this restriction shall not prevent the Fund
from (a) investing in securities of issuers engaged in the real
estate business or the business of investing in real estate
(including interests in limited partnerships owning or otherwise
engaging in the real estate business or the business of investing in
real estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate received in
connection with securities it holds or held; (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the Funds'
investment objective and policies); or (d) investing in real estate
investment trust securities.
8. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales of
portfolio securities) or sell any securities short (except "against
the box"). For purposes of this restriction, the deposit or
payment by the Fund of underlying securities and other assets in
escrow and collateral agreements with respect to initial or
maintenance margin in connection with futures contracts and related
options and options on securities, indexes or similar items is not
considered to be the purchase of a security on margin.
9. Invest more than 5% of the value of its net assets in warrants,
included within that amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants that are not listed on the
New York Stock Exchange, Inc. (the "NYSE") or the American Stock
Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
10. Invest in mineral-type programs or leases.
11. Purchase or otherwise acquire any security if, as a result, more
than l5% of its net assets would be invested in securities that are
illiquid.
12. Purchase the securities of any other open-end investment company,
except through a purchase on the open market involving no
commission or profit to a sponsor or dealer (other than the
customary stock exchange or over-the-counter brokerage commission)
and except as part of a merger, consolidation or acquisition of
assets.
13. Invest for the purpose of exercising control of management.
14. Purchase securities of any company with a record of less than three
years' continuous operation if such purchase would cause its
investments in such companies to exceed 5% of the value of its
total assets. (For purposes of this limitation, issuers include
predecessors, sponsors, controlling persons, general partners,
guarantors and originators of underlying assets.)
If any percentage restriction described above is complied with at the
time of an investment, a later increase or decrease in percentage
resulting from a change in values or assets will not constitute a
violation of such restriction.
Certain of these restrictions were adopted as the result of undertakings
to state securities commissions and must be complied with only as long as
the Fund's shares are registered in the particular state. In order to
permit the sale of the Fund's shares in certain states, the Fund may make
commitments more restrictive than the investment restrictions described
above such as those regarding oil and mineral leases and real estate
limited partnerships.
Certain Investment Activities
While the Fund is authorized to borrow money from banks for purposes of
investment (leveraging) and to invest in securities of foreign issuers,
it has no current intention of engaging in these investment activities
and will do so only when the Fund's Board of Directors determines that
either or both of these activities are in the best interests of
shareholders.
Portfolio Turnover
The Fund generally does not engage in short-term trading but intends to
purchase securities for long-term capital appreciation. While the Fund's
portfolio turnover rate has in the past exceeded 100%, the Fund's annual
portfolio turnover rate is not expected to exceed 100%. A portfolio
turnover rate of 100% would occur if all of the securities in the Fund's
portfolio were replaced once during a period of one year. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales
of portfolio securities for the year by the monthly average value of
portfolio securities. Securities with remaining maturities of one year
or less at the date of acquisition are excluded from the calculation.
For the fiscal years ended December 31, 1997 and 1996, the Fund's
portfolio turnover rate was 57% and 62%, respectively.
Future portfolio turnover rates may vary greatly from year to year as
well as within a particular year and may be affected by cash requirements
for redemptions of the Fund's shares as well as by requirements that
enable the Fund to receive favorable tax treatment. Portfolio turnover
rates will largely depend on the level of purchases and redemptions of
Fund shares. Higher portfolio turnover rates can result in corresponding
increases in brokerage commissions. In addition, to the extent that the
Fund realizes short-term gains as the result of more portfolio
transactions, such gains would be taxable to shareholders at ordinary
income tax rates.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by MMC,
subject to the overall supervision and review of the Fund's Board of
Directors. Portfolio securities transactions for the Fund are effected by
or under the supervision of MMC.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market, but the price
of those securities includes an undisclosed commission or mark-up. Over-
the-counter purchases and sales are transacted directly with principal
market makers except in those cases in which better prices and executions
may be obtained elsewhere. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include
a dealer's mark-up or mark-down. For the fiscal years ended December 31,
1997, 1996 and 1995, the Fund paid total brokerage commissions of
$4,113,439, $4,357,932 and $3,736,847, respectively.
In executing portfolio transactions and selecting brokers or dealers, it
is the Fund's policy to seek the best overall terms available. MMC, in
seeking the most favorable price and execution, considers all factors it
deems relevant, including, for example, the price, the size of the
transaction, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the broker-
dealer in other transactions. MMC receives research, statistical and
quotation services from several broker-dealers with which it places the
Fund's portfolio transactions. It is possible that certain of the
services received primarily will benefit one or more other accounts for
which MMC exercises investment discretion. Conversely, the Fund may be
the primary beneficiary of services received as a result of portfolio
transactions effected for other accounts. MMC's fee under the Advisory
Agreement is not reduced by reason of its receiving such brokerage and
research services. The Fund's Board of Directors, in its discretion, may
authorize MMC to cause the Fund to pay a broker that provides brokerage
and research services to MMC a commission in excess of that which another
qualified broker would have charged for effecting the same transaction.
Smith Barney will not participate in commissions from brokerage given by
the Fund to other brokers or dealers and will not receive any reciprocal
brokerage business resulting therefrom.
In accordance with Section 17(e) of the 1940 Act and Rule 17(e)
thereunder, the Fund's Board of Directors has determined that any
portfolio transaction for the Fund may be executed through Smith Barney
or an affiliate of Smith Barney if, in MMC's judgment, the use of Smith
Barney or an affiliate is likely to result in price and execution at
least as favorable as those of other qualified brokers and if, in the
transaction, Smith Barney or the affiliate charges the Fund a commission
rate consistent with those charged by Smith Barney or an affiliate to
comparable unaffiliated customers in similar transactions. In addition,
under rules recently adopted by the SEC, Smith Barney may directly
execute such transactions for the Fund on the floor of any national
securities exchange, provided: (a) the Board of Directors has expressly
authorized Smith Barney to effect such transactions; and (b) Smith Barney
annually advises the Fund of the aggregate compensation it earned on such
transactions. For the fiscal year ended December 31, 1997, the Fund paid
$593,460 in brokerage commissions to Smith Barney, or 14.40% of the total
brokerage commissions paid. Smith Barney secured 11.0% of the aggregate
dollar amount of transactions involving commissions during the 1997
fiscal year. For the 1997, 1996 and 1995 fiscal years, the Fund paid
$557,460, $685,248 and $637,506, respectively, in brokerage commissions
to Smith Barney.
Even though investment decisions for the Fund are made independently from
those of the other accounts managed by MMC, investments of the kind made
by the Fund also may be made by those other accounts. When the Fund and
one or more accounts managed by MMC are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by MMC to be equitable.
In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained for or disposed
of by the Fund.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in the
Prospectus applies to purchases made by any "purchaser," which is defined
to include the following: (a) an individual; (b) an individual's spouse
and his or her children purchasing shares for their account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; (d) a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and qualified employee benefit plans of
employers who are "affiliated persons" of each other within the meaning
of the 1940 Act; (e) tax-exempt organizations enumerated in Section 501
(c)(3) or (13) of the Code; and (f) a trustee or other professional
fiduciary (including a bank, or an investment adviser registered with the
SEC under the Investment Advisers Act of 1940, as amended) purchasing
shares of the Fund for one or more trust estates or fiduciary accounts.
Purchasers who wish to combine purchase orders to take advantage of
volume discounts should contact a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A shares of the Fund and in Class A shares of other Smith Barney
Mutual Funds that are offered with a sales charge, including the purchase
being made, of any purchaser is $25,000 or more. The reduced sales
charge is subject to confirmation of the shareholder's holdings through a
check of appropriate records. The Fund reserves the right to terminate
or amend the combined right of accumulation at any time after written
notice to shareholders. For further information regarding the combined
right of accumulation, shareholders should contact a Smith Barney
Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The
public offering price for a Class A, Class Y and Class Z share of the
Fund is equal to the net asset value per share at the time of purchase,
plus for Class A shares, an initial sales charge based on the aggregate
amount of the investment. The public offering price for a Class B and
Class C share (and Class A share purchases, including applicable rights
of accumulation, equaling or exceeding $500,000) is equal to the net
asset value per share at the time of purchase and no sales charge is
imposed at the time of purchase. A contingent deferred sales charge
("CDSC"), however, is imposed on certain redemptions of Class B and Class
C shares, and of Class A shares when purchased in amounts equaling or
exceeding $500,000. The method of computation of the public offering
price is shown in the Fund's financial statements incorporated by
reference in their entirety into this Statement of Additional
Information.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements have
been approved by the Internal Revenue Service and are available from the
Fund or Smith Barney; investors should consult with their own tax or
retirement planning advisors prior to the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual Retirement
Accounts ("IRAs"). Under these new provisions, if you or your spouse have
earned income, each of you may establish an IRA and make maximum annual
contributions equal to the lesser of earned income or $2,000. As a result
of this legislation, married couples where one spouse is non-working may
now contribute a total of $4,000 annually to their IRAs.
The Taxpayer Relief Act of 1997 has changed the requirements for
determining whether or not you are eligible to make a deductible IRA
contribution. Under the new rules effective beginning January 1, 1998, if
you are considered an active participant in an employer-sponsored
retirement plan, you may still be eligible for a full or partial deduction
depending upon your combined adjusted gross income ("AGI"). For married
couples filing jointly, a full deduction is permitted if your combined AGI
is $50,000 or less ($30,000 for unmarried individuals); a partial
deduction will be allowed when AGI is between $50,000-$60,000 ($30,000-
$40,000 for an unmarried individual); and no deduction when AGI is $60,000
($40,000 for an unmarried individual). However, if you are married and
your spouse is covered by a employer-sponsored retirement plan, but you
are not, you will be eligible for a full deduction if your combined AGI is
$150,000 or less. A partial deduction is permitted if your combined AGI
is between $150,000-$160,000 and no deduction is permitted after $160,000.
A Rollover IRA is available to defer taxes on lump sum payments and
other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension - IRA
("SEP-IRA") on behalf of eligible employees may make a maximum annual
contribution to each participant's account of 15% (up to $24,000) of each
participant's compensation. Compensation is capped at $160,000 for 1998.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-corporate
entities may purchase shares of the Fund through the Smith Barney
Prototype Paired Defined Contribution Plan (the "Prototype"). The
Prototype permits adoption of profit-sharing provisions, money purchase
pension provisions, or both, to provide benefits for eligible employees
and their beneficiaries. The Prototype provides for a maximum annual tax
deductible contribution on behalf of each Participant of up to 25% of
compensation, but not to exceed $30,000 (provided that a money purchase
pension plan or both a profit-sharing plan and a money purchase pension
plan are adopted thereunder).
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the NYSE is closed (other than for
customary weekend or holiday closings), (b) when trading in markets the
Fund normally utilizes is restricted, or an emergency, as determined by
the SEC, exists so that disposal of the Fund's investments or
determination of net asset value is not reasonably practicable or (c) for
such other periods as the SEC by order may permit for the protection of
the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Fund determines that it would be
detrimental to the best interests of the remaining shareholders to make a
redemption payment wholly in cash, the Fund may pay, in accordance with
SEC rules, any portion of a redemption in excess of the lesser of
$250,000 or 1% of the Fund's net assets by distribution in kind of
portfolio securities in lieu of cash. Securities issued as a
distribution in kind may incur brokerage commissions when shareholders
subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of
cash monthly or quarterly. Withdrawals of at least $50 may be made under
the Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. Any applicable
CDSC will not be waived on amounts withdrawn by shareholders that exceed
1.00% per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences. (With respect to Withdrawal Plans in effect
prior to November 7, 1994, any applicable CDSC will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commenced.) To the
extent withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in the
value of the shareholder's investment and continued withdrawal payments
will reduce the shareholder's investment and ultimately may exhaust it.
Withdrawal payments should not be considered as income from investment in
the Fund. Furthermore, as it generally would not be advantageous to a
shareholder to make additional investments in the Fund at the same time
he or she is participating in the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with the Transfer Agent as agent for Withdrawal Plan members. All
dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the
Fund. Withdrawal Plans should be set up with a Smith Barney Financial
Consultant. A shareholder who purchases shares directly through the
Transfer Agent may continue to do so and applications for participation
in the Withdrawal Plan must be received by the Transfer Agent no later
than the eighth day of the month to be eligible for participation
beginning with that month's withdrawal. For additional information,
shareholders should contact a Smith Barney Financial Consultant.
DISTRIBUTORS
Smith Barney serves as the Fund's distributor on a best efforts basis
pursuant to a written agreement (the "Distribution Agreement") which was
most recently approved by the Fund's Board of Directors on July 17, 1997.
For the fiscal years ended December 31, 1997, 1996 and 1995, Smith Barney
received approximately $2.0 million, $1.8 million and $1.7 million,
respectively, in sales charges for the sale of Class A shares and did not
reallow any portion thereof to dealers. For the fiscal years ended
December 31, 1997, 1996 and 1995, Smith Barney received approximately
$1,305,000, $1,512,000 and $1,912,000, respectively, representing CDSC on
redemptions of the Fund's Class B shares. For the fiscal years ended
December 31, 1997, 1996, and 1995, Smith Barney received approximately
$9,000, $6,000 and $4000, respectively, representing CDSC on redemptions
of the Fund's Class C shares.
PFS Distributors, located at 3100 Breckinridge Blvd., Building 200,
Duluth, Georgia 30199-0062, also, serves as one of the Fund's distributors
on a best efforts basis requiring PFS Distributors to take and pay for
only such securities as may be sold to the public pursuant to a
Distribution Agreement dated July 1, 1995. The only classes of shares
being offered for sale through PFS Distributors are Class A shares and
Class B shares.
When payment is made by the investor, unless otherwise noted by the
investor, the funds will be held as a free credit balance in the
investor's brokerage account and Smith Barney may benefit from the
temporary use of the funds. The investor may designate another use for
the funds prior to settlement date, such as an investment in a money
market fund (other than Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to invest
the funds in a Smith Barney money market fund, the amount of the
investment will be included as part of the average daily net assets of
both the Fund and the Smith Barney money market fund, and affiliates of
Smith Barney that serve the funds in an investment advisory or
administrative capacity will benefit from the fact they are receiving
fees from both such investment companies for managing these assets
computed on the basis of their average daily net assets. The Fund's
Board of Directors has been advised of the benefits to Smith Barney
resulting from these settlement procedures and will take such benefits
into consideration when reviewing the Advisory, Administration and
Distribution Agreements for continuance.
For the fiscal year ended December 31, 1997, Smith Barney and/or PFS
Distributors incurred distribution expenses totaling approximately
$19,137,273 for advertising, printing and mailing of Prospectuses,
support services, to Smith Barney Financial Consultants, and in accruals
for interest on the excess of Smith Barney expenses incurred in
distribution of the Fund's shares over the sum of the distribution fees
and CDSC received by Smith Barney and/or PFS Distributors from the Fund.
Distributions Arrangements
To compensate Smith Barney for the services it provides and for the
expense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, the Fund pays Smith Barney a service fee,
accrued daily and paid monthly, calculated at the annual rate of 0.25% of
the value of the Fund's average daily net assets attributable to the
Class A, Class B and Class C shares. In addition, the Fund pays Smith
Barney a distribution fee with respect to the Class B and Class C shares
primarily intended to compensate Smith Barney for its initial expense of
paying Financial Consultants a commission upon sales of those shares. The
Class B and Class C distribution fee is calculated at the annual rate of
0.75% of the value of the Fund's average daily net assets attributable to
the shares of the respective Class.
The only Classes of shares being offered for sale through PFS
Distributors are Class A shares and Class B shares. Pursuant to the
Plan (described above), PFS Distributors is paid an annual service fee
with respect to Class A and Class B shares of the Fund sold through PFS
Distributors at the annual rate of 0.25% of the average daily net assets
of the respective Class. PFS Distributors is also paid an annual
distribution fee with respect to Class B shares at the annual rate of
0.75% of the average daily net assets attributable to that Class. Class B
shares that automatically convert to Class A shares eight years after the
date of original purchase will no longer be subject to a distribution
fee. The fees are paid to PFS Distributors, which in turn, pays PFS
Investments Inc. ("PFS Investments") to pay its Investments Registered
Representatives for servicing shareholder accounts and, in the case of
Class B shares, to cover expenses primarily intended to result in the
sale of those shares. These expenses include: advertising expenses; the
cost of printing and mailing prospectuses to potential investors;
payments to and expenses of Investments Registered Representatives and
other persons who provide support services in connection with the
distribution of shares; interest and/or carrying charges; and indirect
and overhead costs of PFS Investments associated with the sale of Fund
shares, including lease, utility, communications and sales promotion
expenses.
The payments to PFS Investments Registered Representatives for selling
shares of a Class include a commission or fee paid by the investor or PFS
at the time of sale and, with respect to Class A and Class B shares, a
continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. PFS Investments Registered
Representatives may receive different levels of compensation for selling
different Classes of shares.
PFS Investments may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, PFS or its affiliates may
also pay for certain non-cash sales incentives provided to PFS
Investments Registered Representatives. Such incentives do not have any
effect on the net amount invested. In addition to the reallowances from
the applicable public offering price described above, PFS may from time
to time, pay or allow additional reallowances or promotional incentives,
in the form of cash or other compensation to PFS Investments Registered
Representatives that sell shares of the Fund.
The following service and distribution fees were incurred during the
periods indicated:
DISTRIBUTION PLAN FEES
Fiscal Year
Ended
12/31/97
Fiscal
Year
Ended
12/31/96
Fiscal Year
Ended
12/31/95
CLASS A
$ 5,849,540
$
5,002,144
$4,551,117
CLASS B
12,927,331
10,505,436
8,770,866
CLASS C
360,402
203,764
87,811
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Fund's Board of
Directors, including a majority of the Independent Directors. The Plan
may not be amended to increase the amount of the service and distribution
fees without shareholder approval, and all amendments of the Plan also
must be approved by the Directors and Independent Directors in the manner
described above. The Plan may be terminated with respect to a Class of
the Fund at any time, without penalty, by vote of a majority of the
Independent Directors or by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Class. Pursuant to the
Plan, Smith Barney and PFS Distributors will provide the Fund's Board of
Directors with periodic reports of amounts expended under the Plan and
the purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE
currently is scheduled to be closed on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday
or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Because of the differences in distribution fees
and Class-specific expenses, the per share net asset value of each Class
may differ. The following is a description of the procedures used by the
Fund in valuing its assets.
Securities listed on a national securities exchange will be valued on the
basis of the last sale on the date on which the valuation is made or, in
the absence of sales, at the mean between the closing bid and asked
prices. Over-the-counter securities will be valued at the mean between
the closing bid and asked prices on each day, or, if market quotations
for those securities are not readily available, at fair value, as
determined in good faith by the Fund's Board of Directors. Short-term
obligations with maturities of 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Fund's Board of
Directors. Amortized cost involves valuing an instrument at its original
cost to the Fund and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of
fluctuating interest rates on the market value of the instrument. All
other securities and other assets of the Fund will be valued at fair
value as determined in good faith by the Fund's Board of Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Smith Barney Mutual Fund may
exchange all or part of their shares for shares of the same Class of
other Smith Barney Mutual Funds, to the extent such shares are offered
for sale in the shareholder's state of residence, on the basis of
relative net asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may
be exchanged for Class A shares of any of the other funds,
and the sales charge differential, if any, will be applied.
Class A shares of any fund may be exchanged without a sales
charge for shares of the funds that are offered without a
sales charge. Class A shares of any fund purchased without a
sales charge may be exchanged for shares sold with a sales
charge, and the appropriate sales charge differential will be
applied.
B. Class A shares of any fund acquired by a previous exchange of
shares purchased with a sales charge may be exchanged for
Class A shares of any of the other funds, and the sales
charge differential, if any, will be applied.
C. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B
shares of another fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of
calculating CDSC rates and conversion periods, will be deemed
to have been held since the date the shares being exchanged
were deemed to be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investor's prior ownership of Class A shares of Smith Barney High Income
Fund and the account number in order to accomplish an exchange of shares
of Smith Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in which the
fund shares being acquired may legally be sold. Prior to any exchange,
the shareholder should obtain and review a copy of the current prospectus
of each fund into which an exchange is being considered. Prospectuses
may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current
net asset value and, subject to any applicable CDSC, the proceeds are
immediately invested, at a price as described above, in shares of the
fund being acquired. Smith Barney reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated
at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote total return of a Class in
advertisements or in reports and other communications to shareholders.
The Fund may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include
the following industry and financial publications: Barron's, Business
Week, CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. To the
extent any advertisement or sales literature of the Fund describes the
expenses or performance of any Class it will also disclose such
information for the other Classes.
Average Annual Total Return
"Average annual total return" figures are computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or fractional
portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's average annual total return was as follows for the periods
indicated:
19.95% for the one-year period beginning on January 1, 1997 through
December 31, 1997
14.69% per annum during the five-year period beginning on January 1, 1993
through December 31, 1997
14.64% per annum during the ten-year period beginning on January 1, 1988
through December 31, 1997
The average annual total return figures assume that the maximum 5.00%
sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge had not been deducted, Class A's
average annual total return for those same periods would have been
26.29%, 15.87% and 15.23%, respectively.
Class B's average annual total return was as follows for the periods
indicated:
20.31% for the one-year period beginning on January 1, 1997 through
December 31, 1997
14.88% per annum during the five-year period beginning on January 1, 1993
through December 31, 1997
15.23% for the period from inception (November 6, 1992) through December
31, 1997
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time of
redemption. If the maximum CDSC had not been deducted, Class B's average
annual total return for those same periods would have been 25.31%, 14.99%
and 15.23%, respectively.
Class C's (formerly Class D's) average annual total return was as follows
for the periods indicated:
24.31% for the one-year period beginning on January 1, 1997 through
December 31,1997
14.61% for the period from inception (February 4, 1993) through December
31,1997
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time of
redemption. If the maximum CDSC had not been deducted, Class C's average
annual total return for those same periods would have been 25.31% and
14.61%, respectively.
Class Y's average annual total return was as follows for the period
indicated:
26.70% for the one-year period beginning on January 1, 1997 through
December 31,1997
23.10% for the period from inception (January 30, 1996) through December
31,1997
Class Y shares do not incur sales charges nor CDSCs.
Class Z's average annual total return was as follows for the periods
indicated:
26.72% for the one-year period beginning on January 1, 1997 through
December 31,1997
16.23% per annum during the five-year period beginning on January 1, 1993
through December 31, 1997
16.46% for the period from inception (November 6, 1992) through December
31, 1997
Class Z shares do not incur sales charges nor CDSCs.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in the
value of an investment in the Class for the specified period and are
computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000
ERV = Ending Redeemable Value of a hypothetical $10,000
investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or fractional
portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's aggregate total return was as follows for the periods
indicated:
19.95% for the one-year period beginning on January 1, 1997 through
December 31, 1997
98.45% for the five-year period beginning on January 1, 1993 through
December 31, 1997
292.24% for the ten-year period beginning on January 1, 1988 through
December 31, 1997
These aggregate total return figures assume the maximum 5.00% sales
charge has been deducted from the investment at the time of purchase. If
the maximum sales charge had not been deducted, Class A's aggregate total
return for those same periods would have been 26.29%, 108.88% and 312.79%
respectively.
Class B's aggregate total return was as follows for the periods
indicated:
20.31% for the one-year period beginning on January 1, 1997 through
December 31, 1997
100.07% for the five-year period beginning on January 1, 1993 through
December 31, 1997
107.66% for the period from inception (November 6, 1992) through December
31, 1997.
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If
the maximum applicable CDSC had not been deducted, Class B's aggregate
total return for those same periods would have been 25.31%, 101.07% and
107.66%, respectively.
Class C's aggregate total return was as follows for the periods
indicated:
24.31% for the one-year period beginning on January 1, 1997 through
December 31, 1997
95.23% for the period from inception (February 4, 1993) through December
31, 1997
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If
the maximum applicable CDSC had not been deducted, Class C's aggregate
total return for those same periods would have been 25.31% and 95.23%,
respectively.
Class Y's average annual total return was as follows for the period
indicated:
26.70% for the one-year period beginning on January 1, 1997 through
December 31, 1997
49.06% for the period from inception (January 30, 1996) through December
31,1997
Class Y shares do not incur sales charges nor CDSCs.
Class Z's average annual total return was as follows for the periods
indicated:
26.72% for the one-year period beginning on January 1, 1997 through
December 31,1997
112.16% for the five-year period beginning on January 1, 1993 through
December 31, 1997
119.33% for the period from inception (November 6, 1992) through December
31, 1997
Class Z shares do not incur sales charges nor CDSCs.
Performance will vary from time to time depending on market conditions,
the composition of the Fund's portfolio, operating expenses and the
expenses exclusively attributable to the Class. Consequently, any given
performance quotation should not be considered representative of the
Class' performance for any specified period in the future. Because
performance will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or other investments
that pay a fixed yield for a stated period of time. Investors comparing
the Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Fund and its shareholders. The summary is not
intended as a substitute for individual tax advice and investors are
urged to consult their own tax advisors as to the tax consequences of an
investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. If the Fund (a) qualifies as
a regulated investment company and (b) distributes to its shareholders at
least 90% of its net investment income (including, for this purpose, its
net realized short-term capital gains), the Fund will not be liable for
Federal income taxes to the extent that its net investment income and its
net realized long- and short-term capital gains, if any, are distributed
to its shareholders.
Gains or losses on the sales of stock or securities by the Fund generally
will be long-term capital gains or losses if the Fund has held the stock
or securities for more than one year. Gains or losses on sales of stock
or securities held for not more than one year generally will be short-
term capital gains or losses.
Any net long-term capital gains realized by the Fund will be distributed
annually as described in the Prospectus. Such distributions ("capital
gain dividends") will be taxable to shareholders as long-term capital
gains, regardless of how long a shareholder has held Fund shares, and
will be designated as capital gain dividends in a written notice mailed
by the Fund to shareholders after the close of the Fund's prior taxable
year. If a shareholder receives a capital gain dividend with respect to
any share and if the share has been held by the shareholder for six
months or less, then any loss on the sale or exchange of such share will
be treated as a long-term capital loss to the extent of the capital gain
dividend.
The portion of the dividends received from the Fund that qualifies for
the dividends-received deduction for corporations will be reduced to the
extent that the Fund holds dividend-paying stock for less than 46 days
(91 for certain preferred stocks). The Fund's holding period will not
include any period during which the Fund has reduced its risk of loss
from holding the stock by purchasing an option to sell or entering into a
short sale of substantially identical stock or securities convertible
into the stock. The holding period for stock may also be reduced if the
Fund diminishes its risk of loss by holding one or more other positions
with respect to substantially similar or related properties. Dividends-
received deductions will be allowed only with respect to shares that a
corporate shareholder has held for at least 46 days within the meaning of
the same holding period rules applicable to the Fund.
If the Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends shall be
included in the Fund's gross income as of the later of (a) the date that
such stock became ex-dividend with respect to such dividends (that is,
the date on which a buyer of the stock would not be entitled to receive
the declared but unpaid, dividends) or (b) the date that the Fund
acquired such stock. Accordingly, in order to satisfy its income
distribution requirements, the Fund may be required to pay dividends
based on anticipated earnings and shareholders may receive dividends in
an earlier year than would otherwise be the case.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a
mutual fund for which the otherwise applicable sales charge is reduced by
reason of a reinvestment right (that is exchange privilege), the original
sales charge will not be taken into account in computing gain/loss on the
original shares to the extent the subsequent sales charge is reduced.
Instead, it will he added to the tax basis in the newly acquired shares.
Furthermore, the same rule also applies to a disposition of the newly
acquired or redeemed shares made within 90 days of the second
acquisition. This provision prevents a shareholder from immediately
deducting the sales charge by shifting his or her investment in a family
of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should be
aware that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming dividend or distribution
payment, any such payment will be a taxable dividend or distribution
payment.
If a shareholder fails to furnish a correct taxpayer identification
number, fails fully to report dividend and interest income, or fails to
certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to "backup withholding," then
the shareholder may be subject to a 31% backup withholding tax with
respect to (a) any taxable dividends and distributions and (b) the
proceeds of any redemptions of Fund shares. An individual's taxpayer
identification number is his or her social security number. The backup
withholding tax is not an additional tax and may be credited against a
shareholder's regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult
their tax advisors with specific reference to their own tax situations,
including their state and local tax liabilities.
ADDITIONAL INFORMATION
The Fund was incorporated on September 2, 1969 under the name The
Shearson Appreciation Fund, Inc. On October 28, 1987, November 5, 1995,
July 30, 1993 and October 14, 1994, the Fund changed its name to Shearson
Lehman Appreciation Fund Inc., Shearson Lehman Brothers Appreciation Fund
Inc., Smith Barney Shearson Appreciation Fund Inc. and Smith Barney
Appreciation Fund Inc., respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the custodian of the Fund. Under its agreement with the
Fund, PNC holds the Fund's portfolio securities and keeps all necessary
accounts and records. For its services, PNC receives a monthly fee based
upon the month-end market value of securities held in custody and also
receives securities transaction charges. The assets of the Fund are held
under bank custodianship in compliance with the 1940 Act.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston, Massachusetts 02109, serves as the Fund's transfer agent. Under
the transfer agency agreement, the Transfer Agent maintains the
shareholder account records for the Fund, handles certain communications
between shareholders and the Fund and distributes dividends and
distributions payable by the Fund. For these services, the Transfer
Agent receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Fund during the month and is
reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended December 31, 1997 is
incorporated herein by reference in its entirety.
Smith Barney
Appreciation
Fund Inc.
Statement of
Additional Information
April 30, 1998
Smith Barney
Appreciation Fund Inc.
388 Greenwich Street
New York, New York 10013
34
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